Banking Sector. Ready to embark on the next expedition

Banking Sector Ready to embark on the next expedition August 2015

Contents Executive Summary 03 Stability of the Banking System 37 Overview of the Banking Sector 05 Capital Adequacy 38 The Economy 06 Credit Ratings 41 Credit Growth 08 Liquidity 41 Sector Composition 10 Recent Policies and Regulations 43 Banking Sector Growth 12 Competition in the Sector 45 Loans 13 Outlook for Listed Banking Stocks 48 Deposits 17 BFI Sector 49 Branch Network 20 Listed Banking Counters Borrowings 22 Commercial Bank of Ceylon (COMB) 55 Risks in the Banking System 24 Hatton National Bank (HNB) 58 Credit Risk 25 Sampath Bank (SAMP) 61 Interest Rate Risk 26 National Development Bank (NDB) 64 Exchange Rate Risk 28 Seylan Bank (SEYB) 67 Profitability of the Banking Sector 29 Nations Trust Bank (NTB) 70 Net Interest Income 30 Pan Asia Banking Corporation (PABC) 73 Net Interest Margins 31 Union Bank of Colombo (UBC) 76 Non Interest Income 32 DFCC Bank (DFCC) 79 Cost Structure 33 Profitability 34 Return on Equity and Assets 35 2

Sri Lankan Banking Sector Executive Summary The Sri Lankan Banking system is strongly correlated with the economic activity of the country. We anticipate Sri Lanka to move towards the upper middle income category within the next three years. Hence, in the short term, we estimate the economy to grow by 6.4%, 7.0% and 7.2% 1 in 2015, 2016 and 2017 respectively. The expansion of the economy may require the banks to play a key role in financing the new and expanding corporates and the Small & Medium Enterprises (SME). The retail customer segment seeking convenient banking options may continue to be a significant portion of the sector loan book. Hence, we estimate the banking sector to grow by ~16.8%, 18.4% and 18.9% 1 in 2015, 2016 and 2017 respectively. In order to facilitate the growth, banks may require to shift from collateral based lending to cash flow based lending, introduce transparent fee structures, utilise the state of the art IT infrastructure and address other structural inefficiencies of the banking system. Currently, banks operate on a brick and mortar business model which has resulted in a high branch density compared to the region. We believe the sector should move towards a virtual banking business reducing costs and offering convenience to the customers in the medium term. Borrowings have been increasing mainly due to attractive interest rates, increased demand for listed debentures due to tax concessions and subordinated debt being cheaper than equity that supports a strong total capital. Further, the borrowing mix (FCY:LKR) has been changing from 3:7 (FY10) to 6:4 (1QFY15) due to the Fed rate cut in the past and credit ceiling imposed by CBSL encouraging foreign funding. However, with a probable Fed rate hike in site, we do not expect the share of FCY to increase further. Continued to next page 1 NDBS research 3

Sri Lankan Banking Sector Executive Summary - Continued The Sri Lankan banking sector is relatively resilient to internal and external shocks compared to other sectors. This is mainly due to industry practices and stringent regulations imposed by CBSL. CBSL has outlined the implementation of Basel III in the coming years. We expect the additional regulatory improvements to further enhance the capital buffers and liquidity of the system. However, five banks out of the 25 licensed commercial banks, hold more than 80% of the total banking sector assets. High competition amongst smaller banks will threaten their return on equity in the long run. Hence, we believe that banking consolidation will further strengthen the system and improve banks access to financing via international capital markets. We expect the current mid single digit interest rate environment and single low digit inflation to remain stable in the short term. Hence, we do not expect banking system to face significant credit risk or interest rate risk in the near future. Currently, most of the banks have a diversified loan portfolio coupled with low NPLs. The exchange rate risk is relatively high due to current Balance of Payments status due to a persistent trade deficit. In the short term, we expect most of the listed counters NIMs to contract due to the low interest rate environment and increased competition. However, most of the banks focus towards fee based income is expected to support the bottom line. The cost to income ratios are expected to improve. This is due to the slowdown in aggressive branch expansion that took place post war and a shift towards virtual banking models. The banking sector has continuously delivered a consistent return on equity in the past (average of 18.9% 2 in the last 5 years) and is equipped to generate consistent returns in the future as well. 2 CBSL 4

Contents Overview of the Banking Sector The Economy Credit Growth Sector Composition 5

The Economy Real GDP Growth (2014) Regional Peers With GDP growth of Sri Lanka being one of the highest among the region, we expect the banking sector to be attractive on a regional level 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 3.30% 4.40% 5.6% 6.8% 7.4% 3.3% 3.7% 6.1% 7.2% 7.0% 5.0% 6.0% 6.1% 2.9% 6.0% 7.4% 2.0% 1.80% 1.0% % World Advanced Emerging Economies markets and developing econmies Asia Emerging Asia China Korea Taiwan Bangladesh India Cambodia Indonesia Malaysia Philippines Singapore Vietnam Sri Lanka We estimate Sri Lanka GDP growth to dip to 6.4% 1 in 2015 (2002 as the base year) due to the economic stagnation. This was a result of political uncertainty that prevailed due to the recently concluded general elections. However, we expect the economic recovery in 2016 with private and public investment increasing. However, official estimates for GDP growth in 2015: ADB 7.0% World Bank 6.9% IMF 6.5% Ministry of Finance & Planning 7.2% Sources: IMF World Economic outlook January 2015, Asia & Pacific s outlook, 1 NDBS Research 6

The Economy Macro Economic Outlook for Sri Lanka Real GDP Growth 1 Headline Inflation Public Debt Budget Deficit Balance of Payments 2013 (A): 2013 (A): 2013 (A): 2013 (A): 2013 (A): 7.2% 6.9% 78.3% 5.8% USD 0.7 Bn 2014 (A): 2014 (A): 2014 (A): 2014 (A): 2014 (A): 7.4% 3.3% 75.5% 6.0% USD 1.4 Bn 2015 (E): 2015 (E): 2015 (E): 2015 (E): 2015 (E): 7.2% ** 2.0% * 71.0% * 4.4% * USD 2.0 Bn * NDBS estimates 6.4% in 2015 Expected to remain at low single digits High compared to peers Expected to improve FDI expected to increase as a % of GDP Most of the factors affecting economic growth are positive 1 Year 2002 as the base year Sources: * CBSL, **Ministry of finance 7

Credit Growth Real GDP growth GDP Vs Loan Growth 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% % 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 (E) 2016 (E) 2017 (E) 35.0% 3% 25.0% 2% 15.0% 1% 5.0% % -5.0% Banking sector loan growth Real GDP growth Banking sector loan growth Post 2009, the government maintained an expansionary monetary policy fuelling the economy and loan growth Loan growth moving in tandem with the economy (R 2 = 0.48) During the last five years, the banking assets grew 2.63 times the GDP growth Source: CBSL 8

Credit Growth Credit to Private Sector (% of GDP) Sri Lanka over time 40% 35% 30% 25% 20% 15% 10% 5% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Peer country comparison 25% 20% 15% 10% 5% % Sri Lanka s low private-sector credit-to-gdp ratio compared with peers 2010 2011 2012 2013 2014 Sri Lanka Indonesia Vietnam Malaysia Singapore Thailand South Africa Japan United States Sources: CBSL, World Bank 9

Sector Composition Major Financial Institution Breakdown by Total Assets 10% 8% 6% 4% 2% % 3.6% 3.4% 4.0% 4.0% 20.4% 19.4% 19.4% 18.9% 6.4% 6.6% 7.0% 7.1% 8.7% 8.2% 8.9% 9.0% 46.4% 48.2% 48.7% 48.9% 14.6% 14.2% 12.1% 12.2% 2011 2012 2013 2014 Banking Sector Breakdown Other Contractual Savings Institutions Licensed Finance Co. & Specialised Leasing Co. Licensed Specialised Banks Licensed Commercial Banks Central Bank Total Assets of the banking sector stood at LKR 7.2 Tn (USD 53.1 Bn) as at 31 st March 2015 Banking Sector Licensed Commercial Banks (LCB) 25 85% Licensed Specialized Banks (LSB) 8 15% # Local 13 90% Foreign 12 10% Local 8 100% Number of banks Market share based on assets Listed 9 50% Unlisted 4 50% Listed 3 26% Unlisted 5 74% Source: CBSL, Company reports 10

Sector Composition Market Share by Assets (Local LCB) 1QFY15 26.2% 21.5% 14.9% 11.5% 8.3% 4.9% 4.6% 8.1% FY14 25.8% 21.5% 15.0% 11.3% 8.4% 5.1% 4.7% 8.2% FY13 26.9% 22.7% 13.3% 11.5% 8.6% 4.5% 4.8% 7.6% FY12 27.2% 24.2% 12.9% 11.6% 7.9% 4.4% 4.7% 7.2% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% BOC PB COMB HNB SAMP NDB SEYB Others Private banks have outgrown the state owned banks over the years Market Share by Loans (Local LCB) Market Share by Deposits (Local LCB) 1 Q F Y 1 5 23.0% 24.5% 13.9% 11.5% 9.5% 4.9% 4.5% 8.3% 1QFY15 24.4% 22.8% 14.5% 11.7% 9.2% 4.3% 4.9% 8.1% F Y 1 4 22.6% 25.3% 14.8% 11.9% 9.9% 5.2% 4.6% 5.8% FY14 25.4% 22.3% 14.3% 11.5% 9.1% 4.1% 5.0% 8.3% F Y 1 3 24.8% 23.6% 13.9% 11.7% 9.3% 4.5% 4.5% 7.6% FY13 25.5% 23.6% 13.5% 11.6% 9.0% 3.9% 5.0% 7.9% F Y 1 2 25.7% 26.3% 13.5% 11.0% 8.1% 4.0% 4.5% 6.8% FY12 24.5% 24.8% 13.7% 11.9% 8.5% 3.8% 5.1% 7.7% 0% 20% 40% 60% 80% 100% Source: Company reports BOC PB COMB HNB SAMP NDB SEYB Others 0% 20% 40% 60% 80% 100% BOC PB COMB HNB SAMP NDB SEYB Others 11

Contents Banking Sector Growth Loans Deposits Branch Network Borrowings 12

Loans Loan Growth 1QFY15, share of credit to the private sector, government & corporations to total domestic credit stood at ~59.4%, 30.9% and 9.6% respectively. The share of credit to government has increased gradually from 27.4% (in 2011) eating up the private sector share. Banking sector growth picked up in 2H2014 encouraged by the, Policy rate reduction from Dec 2012 onwards Statutory reserve ratio reduction by 200bps in mid 2013 1% 8.0% 6.0% 4.0% 2.0% Loan growth Banking sector loan growth picked up post war, but was curtailed by CBSL through, 1. Increasing policy rates & 2. Imposing a credit ceiling % -2.0% Q1 Q2 Q3 Q4 2013 2014 2015 LKR Tn 4.5 Loans 4.0 3.5 Loan growth 32.6% 3.0 25.2% 2.5 21.3% 2.0 13.8% 1.5 8.5% 1.0 4.9% 0.5-3.0% FY09 FY10 FY11 FY12 FY13 FY14 1QFY15 Source: CBSL, NDBS Research 4% 3% 2% 1% % -1% In 2015, we expect the corporate segment along with the Leasing & Hire Purchase, Personal loans segments in the loan portfolio to grow In 2014, 1. Consumer lending was reduced through gold backed loans 2. Growth mainly from rupee denominated lending by the domestic private banks 13

Loans Tea Rubber Coconut Paddy Vegetable and Fruit Livestock and Dairy Farming Fisheries Construction Food and Beverages Textiles and Apparel Wood and Wood Products Paper and Paper Products Chemical, Petroleum, Non-metallic Mineral Basic Metal Products Fabricated Metal Products, Other Manufactured Wholesale and Retail Trade Tourism Financial and Business Transport Communication and Printing and Publishing Education Health Shipping, Aviation and Consumer Durables Pawning Credit Cards Personal Education Personal Healthcare Commercial Banks Loans and Advances to the Private Sector LKR Bn 2009 2010 2011 2012 2013 2014 50 Agriculture & 40 Industry Services Personal Fishing Loans 30 20 10 Loan growth 5% 4% 3% 2% 1% % (1%) (2%) Agriculture and Fishing Industry Services Personal Loan 2010 2011 2012 2013 2014 Construction sector expected to moderate Deliberate reduction in gold backed loans The industry and services sectors are expected to grow further, specially through SMEs We expect the SME sector to be the backbone of the Sri Lankan economy Source: CBSL 14

Loans Funds Disbursed by Commercial and Development Banks to SMEs in 2014 35.0 3 25.0 2 15.0 1 5.0 LKR Bn Industry SME expected to contribute the most to the loan growth going forward (SME contributed 52% to the GDP) Agriculture Services 232.6 45% Industry Other 16 LKR Bn 14 12 10 8 6 4 2 Services 16.0 14.0 12.0 1 8.0 6.0 4.0 2.0 LKR Bn Agriculture 100.3, 19% 53.1 10% 135.4, 26% 4 35.0 3 25.0 2 15.0 1 5.0 LKR Bn Other COMB, SEYB, SAMP and HNB largest contributor in disbursing loans to SME in 2014 Source: Ministry of Finance 15

Loans Sri Lanka Banking Sector Over Time LKR Tn 4.5 LKR Loans FCY Loans 4.0 3.5 21.0% 20.6% 3.0 18.2% 17.8% 2.5 17.3% 2.0 17.2% 79.0% 79.4% 1.5 2% 17.5% 82.2% 81.8% 1.0 82.7% 82.8% 8% 82.5% 0.5 FY08 FY09 FY10 FY11 FY12 FY13 FY14 1QFY15 Outlook of Banks: Loans Banks (Listed Space): LKR/FCY Loans LKR Bn (As at 30 th June 2015) 600 Bangladesh 500 operations 22.7% contributing ~35% 10.9% 400 to FCY loans 300 200 100 0 77.3% 89.1% 13.1% 86.9% 24.7% 8.5% 75.3% 91.5% 3.4% FCY 96.6% Outlook of Banks: Loan Growth LKR 13.7% 86.3% 19.9% 83.4% 8.1% 91.9% COMB HNB SAMP NDB SEYB NTB PABC DFCC LKR Bn 750 2QFY15 (A) 4% FY15 (E) 35.0% 3% 500 FY16 (E) 25.0% FY17 (E) 2% 250 15.0% 1% 5.0% - % COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* *March ended values of the following year Source: CBSL, Company reports, NDBS Research FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* 16

Deposits Banking Sector Deposits LKR Tn 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 87.0% 71.5% 76.4% 7.9% 18.8% 15.9% 84.7% 86.9% 18.8% 18.0% 82.2% Deposits accounts to ~65% of funding 15.0% 83.1% 85.5% FY08 FY09 FY10 FY11 FY12 FY13 FY14 1QFY15 Time Deposits Savings Deposits Demand Deposits Other Deposits Deposit growth Loans to deposits 12.4% 1.9% Currently slowdown in deposit growth does not negatively affect the liquidity, due to banking system liquidity being higher (slow credit growth) Banking Sector CASA ratio 5% With interest rates being low, time deposits were shifted to low cost current and savings deposits in FY14 With interest rates expected to be stable in the next couple of quarters we expect the CASA to remain the same 4% 3% 2% 1% % FY08 FY09 FY10 FY11 FY12 FY13 FY14 1QFY15 Source: CBSL 17

Deposits Deposits (FCY and LKR Breakdown) LKR Tn 5.0 4.5 4.0 3.5 3.0 2.5 FCY Deposits LKR Deposits 19.9% 83.4% % 3 25.0 2 15.0 LKR FCY Deposit Growth 19.9% Exchange rate was depreciated by more than 10% in 2012 2.0 1.5 1 1.0 0.5 FY10 FY11 FY12 FY13 FY14 5.0 FY10 FY11 FY12 FY13 FY14 Main driver of LKR deposits expected to continue its positive trend due to expected increase of GDP per capita favoring increased savings Main driver of FCY deposits expected to increase due to increased skilled migration 25.0 % Domestic Savings as a % of GDP LKR Bn 1,00 Workers Remittances 2 90 80 15.0 70 60 1 50 40 5.0 30 20 2010 2011 2012 2013 2014 10 2010 2011 2012 2013 2014 Source: CBSL 18

Deposits Banks (Listed Space) Outlook: Deposits Deposits (LKR Bn) 1,000 750 The development banks continuously secures long-term funds through credit lines, which compensates the low deposits and CASA levels CASA ratio 6% 5% 4% Banks with larger bank networks has been able to have high CASA ratio 500 3% 250 2% 1% - COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* 2QFY15 (A) FY15 (E) FY16 (E) FY17 (E) Deposit growth 35.0% 3% 25.0% 2% 15.0% 1% 5.0% % Deposit growth slowed down due to unattractive fixed deposit rates, but is expected to pick up in the following years COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) % COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* FY13 (A) FY14 (A) 2QFY15 (A) Loans to Deposits 16% 14% 12% 10% 8% 6% 4% 2% % LTD more than 100% due to credit lines (NDB, DFCC) and equity infusion (UBC) COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) *March ended values of the following year Source: Company reports 19

Branch Network LCB Branch Density Provincial GDP Shares 2 18.0 # of branches per 100,000 people 50% 45% 16.0 40% 14.0 35% 12.0 30% 1 25% 8.0 20% 6.0 15% 4.0 10% 2.0 5% - 2008 2009 2010 2011 2012 2013 2014 0% 2009 2010 2011 2012 2013 Sri Lanka Western Northern Eastern Southern Central North Central Uva North Western Sabaragamuwa Northern province branch density has increased significantly since the war ended and is now in par with the Western province branch density (the highest density in the island) Source: CBSL 20

Branch Network LCB Branch Network 400 Number of branches 300 200 100 3000 2500 2000 1500 1000 500 Listed Space: Branch Network 300 Number of branches 250 200 150 100 50 0 0 2008 2009 2010 2011 2012 2013 2014 Northern Eastern Southern Central North Central Uva North Western Sabaragamuwa Sri Lanka (RHS) Western (RHS) Branch density Regional Peers 2 18.0 16.0 14.0 12.0 1 8.0 6.0 4.0 2.0 Commercial bank branches (per 100,000 adults) 2009 2010 2011 2012 2013 Source: CBSL, World Bank Sri Lanka Thailand Malaysia Indonesia Singapore Vietnam - COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* FY09 (A) FY10 (A) FY11 (A) FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) *March ended values of the following year Northern and Eastern branch outreach has grown rapidly compared to other provinces The rapid branch expansion post war has slowed down across the industry Expected to grow slowly in the near future Sri Lanka branch outreach is much deeper than its peers Developed countries mainly depending on virtual banking system than the traditional branch network 21

Borrowings Borrowings LKR Tn 1.8 1.6 The share of foreign borrowings has been increasing mainly due to the Fed rate cut (i.e. US rates being low since 2008) and CBSL encouraging overseas funding in 2012 (i.e. Credit ceiling on LKR denominated credit growth in 2012 to 18% or LKR 800 Mn, whichever is higher, whilst allowing a growth of 23% or LKR 1 Bn, whichever is higher, for those banks raising funds from overseas to fund the additional growth of credit) 1.4 FCY Borrowings LKR Borrowings 1.2 1.0 59.8% 6% 0.8 0.6 0.4 0.2 64.6% 54.8% 42.2% 3% 31.3% 40.2% 4% 68.7% 7% 57.8% 45.2% 35.4% FY09 FY10 FY11 FY12 FY13 FY14 1QFY15 Borrowings Growth High growth rates of foreign currency borrowings reflects the increasing exchange rate risk faced by the banking system 10% 8% 6% 4% 2% % -2% LKR FCY Total 19.9% -4% FY09 FY10 FY11 FY12 FY13 FY14 1QFY15* *Annualized Source: CBSL 22

Borrowings % of Listed Debt Banks (Listed Space) Outlook: Borrowings 20 18 16 14 12 10 8 6 4 2 Banks (Listed Space): Listed Corporate Debt as % of Borrowings 5% 45.0% 4% 35.0% 3% 25.0% 2% 15.0% 1% 5.0% LKR Bn COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* *March ended values of the following year PABC SEYB NTB SAMP DFCC* HNB NDB % UBC COMB 2 4 6 8 10 12 14 16 18 20 As at end 2014 Borrowings (LKR Bn) FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) Most of the banks have utilized the option of raising listed debt minimizing interest rate risk Source: CBSL 23

Contents Risks in the Banking System Credit Risk Interest Rate Risk Exchange Rate Risk 24

Credit Risk Risks in the Banking Sector 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 Credit risk Quality of loans % 2013: High gold backed NPLs 2014: Reducing trend in NPLs due to absence of high exposure to gold backed loans FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 1QFY15 Gross Non-performing Advances Ratio Gross NPL 14.0% 12.0% 1% 8.0% 6.0% 4.0% 2.0% Net Non-performing Advances Ratio FY13 FY14 2QFY15 Credit exposure of the banking sector 3% 3% 4% 5% 12.5% 1% 7.5% 5.0% 2.5% 6% 18% 9% Net NPL 10% 16% 11% 15% FY13 FY14 2QFY15 Trading Construction Manufacturing Agriculture and Fishing Infrastructure Consumption Financial Services Other Services Tourism Transport Other Four sectors accounting for half of the lending portfolio Well diversified % COMB HNB SAMP NDB SEYB NTB PABC UBC % COMB HNB SAMP NDB SEYB NTB PABC UBC Source: CBSL, World Bank 25

Interest Rate Risk Interest Rate Risk Factors affecting interest rates Monetary Policy - Low Policy Rates - Excess liquidity Inflation Low CCPI Fiscal Policy Fiscal deficit to widen Fundamental Demand Foreign demand for sovereign debt to reduce Most of the factors currently supports a low interest rate environment 26

Interest Rate Risk Interest Rate Risk Policy rates, Treasury bill & bond rates and inflation Policy Rates and Lending/Deposit Rates 16.5% 14.0% 12.0% 14.0% 1% 11.5% 8.0% Low interest and inflation encouraging loan growth 9.0% 6.5% 4.0% Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 May-14 Dec-14 Jul-15 AWDR SDFR AWPLR SLFR Policy rates been reduced since December 2012 With policy rates reducing the interest rates hit a 3 year low last year reducing net interest margins Loans expected to pick up due to attractive low interest rates Interest rates (ST and LT) has been reducing over time Interest rates bottomed out in Nov 2014 and has increased slightly thereafter. However, we do not expect significant increase in interest rates in the near future. 6.0% 4.0% 2.0% % Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 364 day T Bill Inflation Yield Curves 16.0% 14.0% 12.0% Jul-2015 May-2015 1% May-2014 8.0% May-2013 May-2012 6.0% 4.0% 3m 6m 12m 3Y 5Y 10Y 15Y 20Y 30Y Source: CBSL, Bloomberg 27

Exchange Rate Risk Key Factors That Influence a Bank's Operations Exchange rate risk LKR/USD 140 135 130 125 120 115 110 105 100 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 Will affect 1. Borrowing expenses (negative) 2. Interest income (positive) 3. Trading gains in forex (positive) Largest depreciation in 1QFY12 12.0 1 8.0 USD Bn Months of imports 9.0 8.0 7.0 6.0 LKR depreciation for 2015 YTD is 1.9% With foreign reserves falling and a probable US fed rate hike we estimate a 4.1% depreciation for 2015 6.0 4.0 2.0 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 May-15 5.0 4.0 3.0 2.0 1.0 Reserves - Total Foreign Assets Total Foreign Assets (Months of Imports) Source: CBSL, Bloomberg, NDBS Research 28

Contents Profitability of the Banking Sector Net Interest Income Net Interest Margins Non interest Income Cost Structure Profitability Return on Equity and Assets 29

Net Interest Income Outlook of Banks Listed Space: Profitability Net interest income YoY growth 6% 5% FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) 4% 3% 2% 1% % -1% -2% COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* *March ended values of the following year Fee based income (net) as a % of net interest income (during 1HFY15) 5% 4% In order to compensate for contracting NIMs, banks are concentrating more on increasing its non-interest income, mainly the fee based income 3% 2% 1% % COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC Source: Company reports, NDBS Research 30

Net Interest Margins Net Interest Margin (NIM) Banks (Listed space) Regional peers 7.0% NIMs are contracting industry wide (listed space) and we expect the margin to decrease further and be stable from 1H16 with interest rates bottoming out 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Singapore Vietnam Thailand Sri Lanka Indonesia % COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* % FY10 FY11 FY12 FY13 FY14 Interest Rate Spread 7.0% Banks (Listed space) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% % COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* *March ended values of the following year Source: NDBS Research, World Bank, Bloomberg FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) Regional peers 7.0 6.0 5.0 4.0 3.0 2.0 1.0 % With decreasing interest rates, Sri Lanka s spread has decreased drastically compared to its peers 2010 FY11 FY12 FY13 FY14 Sri Lanka Vietnam Indonesia Thailand Singapore 31

Non Interest Income Outlook of Banks: Profitability Non Interest Income as a % of Net Interest Income Sri Lankan banking sector over time 5% 4% 3% 2% 1% % FY08 FY09 FY10 FY11 FY12 FY13 FY14 1QFY15 Listed banks 8% 6% 4% 2% % COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) *March ended values of the following year Source: CBSL, Company reports, NDBS research 32

Cost Structure FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) FY12/13 (A) FY13/14 (A) FY14/15 (A) FY15/16 (E) FY16/17 (E) FY17/18(E) Outlook of Banks Listed Space: Cost to Income Ratios 9% 8% 7% 6% 5% 4% 3% 2% 1% % Personnel cost/income Other cost/income 35.0 3 25.0 2 15.0 1 5.0 COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC Outlook of Banks Listed Space: Employee per Branch Cost to Income and employees per branch can be reduced further with the country moving towards virtual banking system FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* *March ended values of the following year Source: Company reports, NDBS Research 33

Profitability Outlook of Banks Listed Space: Profit Growth 30% FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) 25% 20% 15% 10% 5% % -5% -10% -15% COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* *March ended values of the following year Super Gain Tax (SGT) estimates Cash & cash equiv. (Group) SGT Bank SGT Group LKR Mn 30-June-2015 COMB 2,575 2,610 26,118 HNB Not disclosed Not disclosed 14,008 SAMP Not disclosed Not disclosed 10,578 NDB Not disclosed 846 7,668 SEYB 867 871 6,232 NTB 733 820 4,422 PABC NA NA NA UBC NA NA NA DFCC 533 837 3,399 The interim budget (presented 29 th January 2015) proposed a one off tax of 25% on profits of any company or individual who has earned profits over LKR 2.0 Bn in the tax year 2013/2014 to be paid by end FY15 However, the bill is still not enacted and is not expected to materialize. Hence, not included in NDBS Research forecasts Banks not significantly affected by SGT Source: Company reports, NDBS Research 34

Return on Equity and Assets Profitability SL banking sector: ROE 25.0 2 15.0 1 5.0 % Slowdown in credit growth, reduced interest rates (narrowing interest rate difference) & low yielding investments affecting profitability FY08 FY09 FY10 FY11 FY12 FY13 FY14 1QFY15 Regional peers: ROE 3% SL banking sector: ROA % 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 3.0% FY08 FY09 FY10 FY11 FY12 FY13 FY14 1QFY15 Regional peers: ROA 25.0% 2.5% 2% 15.0% 1% 5.0% Vietnam Singapore Sri Lanka Thailand Indonesia 2.0% 1.5% 1.0% 0.5% Vietnam Singapore Sri Lanka Thailand Indonesia % 2010 2011 2012 2013 2014 % 2010 2011 2012 2013 2014 Source: CBSL, NDBS Research 35

Return on Equity and Assets Outlook of Banks Listed Space: ROE Outlook of Banks Listed Space: ROA 25.0% 2% 15.0% Market share growth and cost-efficient operations determine the ability to deliver strong shareholder returns in the current low interest rate environment FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) 2.5% 2.0% 1.5% FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) 1% 1.0% 5.0% 0.5% % COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* *March ended values of the following year Banking Sector ROE Decomposition % COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 2008 2009 2010 2011 2012 2013 2014 1Q15 14.4 14.2 14 13.8 13.6 13.4 13.2 13 12.8 12.6 12.4 Increasing leverage contributing towards ROE ROE, % Common Equity Margin = (Tier 1 capital/common Equity), % RoRWAs = (Net income/rwas), % Unit Risk = (RWAs/Total assets ), % Financial Leverage = (Total assets/tier 1 capital), times Source: Company reports, NDBS research 36

Contents Stability of the Banking System Capital Adequacy Credit Ratings Liquidity Recent Policies and Regulations Competition in the Sector 37

Capital Adequacy Capital Adequacy Banking Sector 18.0 17.0 16.0 15.0 14.0 13.0 12.0 % Reducing gold backed loans affecting risk weighted assets However, the core and total capital adequacy ratios are well above the regulatory minimum of 5% and 10% respectively FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 1QFY15 Core Capital Total Capital Bank capital to assets ratio (%) Regional peers 14.0 12.0 1 8.0 6.0 4.0 2.0 % = Bank Capital and Reserves.. Total Assets 2011 2012 2013 Sri Lanka India Thailand Singapore Malaysia Indonesia Source: CBSL, World Bank 38

Capital Adequacy Outlook of Banks Listed Space: Core Capital Core capital ratio 45.0% 36.0% 27.0% 18.0% 9.0% = Core Capital. Total Risk Weighted Assets Regulatory Requirement = 5% Capital infusion by Culture Financial Holdings Ltd. % COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* Core capital (LKR Bn) as at 30 th June 2015 7 6 FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) 5 4 Regulatory minimum for LCBs from 2016 = LKR 10 Bn 3 2 1 COMB HNB SAMP NDB SEYB NTB PABC UBC *March ended values of the following year Source: Company reports, NDBS Research 39

Capital Adequacy Banks Listed Space: Gold Backed Loans Exposure to gold backed loans 25.0% 2% 15.0% 1% 5.0% SAMP drastically reduced the exposure to gold. Hence, core capital and total capital ratios were negatively impacted with gold backed loans being substituted by loans with a risk weight. FY13 (A) FY14 (A) 2QFY15 (A) % COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* *March ended values of the following year Gold prices Sharp decline in gold All banks reduced exposure towards gold since 2013. Hence, we do not expect the current decline in gold prices to have a significant impact 2,000 1,800 1,600 1,400 1,200 USD/T Oz 1,000 Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15 Source: Company reports, Bloomberg 40

Capital Adequacy, Credit Ratings and Liquidity Banks Listed Space: Total Capital Ratio 45.0% 36.0% 27.0% 18.0% 9.0% Creditworthiness of Listed Banks: Fitch Ratings 6% 5% = Total Capital. Total Risk Weighted Assets FY13 (A) FY14 (A) 2QFY15 (A) Regulatory Requirement = 10% % COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* *March ended values of the following year Banks Listed Space: Statutory Liquid Assets Ratio COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC National Long-Term Rating (lka) AA AA- A+ AA- A- A BBB BB+ AA- Outlook Stable Stable Stable Stable Stable Stable Negative Stable Stable FY13 (A) FY14 (A) 2QFY15 (A) 4% 3% Regulatory Requirement = 20% 2% 1% % COMB HNB SAMP NDB SEYB NTB PABC UBC Source: Company reports, Fitch Ratings 41

Liquidity Banks Listed Space: Liquidity Risk Cumulative maturity gap as a % of cumulative liabilities 48.0% COMB 48.0% HNB 48.0% SAMP 24.0% 24.0% 24.0% % % % -24.0% -24.0% -24.0% -48.0% 48.0% Upto 1m 1-3m 3-6m 6-12m 1-3Y 3-5Y Over 5Y NDB -48.0% 48.0% Less than 1Y SEYB More than 1Y -48.0% 48.0% Less than 1Y NTB More than 1Y 24.0% 24.0% 24.0% % % % -24.0% -24.0% -24.0% -48.0% Less than 1Y More than 1Y -48.0% Upto 3m 3-12m 1-5Y Over 5Y -48.0% Less than 1Y More than 1Y 48.0% PABC 48.0% UBC Banking Sector 24.0% 24.0% % % -24.0% -24.0% -48.0% Less than 1Y More than 1Y *All listed bank data as at 31 st December 2014-48.0% Less than 1Y More than 1Y Declining interest rates support negative gaps Source: Company reports, NDBS Research 42

Recent Policies and Regulations Banks to Strengthen Financial System Stability Basel III to be implemented Liquidity Coverage Ratio Net Stable Funding Ratio Objective To ensure the bank has an adequate stock of unencumbered high quality liquid assets (HQLA) to meet its liquidity needs for a 30 calendar day liquidity stress scenario Banks to maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities Minimum Value To be implemented 100% 60% coverage in 2015 10% each year thereafter, until 2019 100% 1 st January 2019 Leverage Ratio To restrict the build-up of excessive leverage in the banking sector and capture both on and off-balance sheet sources of banks leverage 3% Observation until end 2016, and standard to be enforced there onwards Increasing capital buffers and liquidity negatively impacts ROEs Capital Conservation Buffer Objective To create capital buffers in good times that can be used to absorb shocks in periods of stress To be implemented Phased in from 2015-2019 0.625% to be added on each year until 2019 Counter-Cyclical Buffer To reduce pro-cyclicality to prevent excessive credit growth Phase out basis Source: CBSL 43

Recent Policies and Regulations Banks to Strengthen Financial System Stability Further measures by CBSL in the recent past 1. Introduction of Credit Guarantee Scheme for Pawning Advances June 2014 2. The Net Open Position (NOP) of commercial banks was revised upwards from USD 120 Mn to USD 189 Mn July 2014 - Banks can expect further gains from a possible foreign exchange depreciation in 2015/16 3. Guidelines were issued to licensed banks on the Stress Testing Framework of banks September 2014 4. Circular issued to all LCBs and LSBs to maintain a minimum core capital level of LKR 10 Bn and LKR 5 Bn respectively, commencing from 1 st January 2016 December 2014 5. Sri Lanka Deposit Insurance and Liquidity Support Scheme increased its deposit insurance coverage per depositor per institution from LKR 200,000 to LKR 300,000 January 2015 Source: CBSL 44

Competition in the Sector Porter s Five Forces Analysis Intensity of Industry Competition Barriers to entry Bargaining power of suppliers Licensing requirements by CBSL Investment in technology and branch network High capital requirements Highly regulated by CBSL Funding institution s bargaining power increase during periods of tight liquidity When interest rates fall, depositors may withdraw funds to deposit /invest elsewhere Bargaining power of customers High for creditworthy customers, large corporate clients Low for retail, SME & micro customers Threat from substitutes Non- banking financial service companies offer similar services Capital market borrowings for large corporates Competition High due to licensed specialized banks, finance and leasing companies offering similar services 45

Competition in the Sector Banks Listed Space: DuPont Analysis for FY14 COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* (a) Return on Equity = Profit/Average Equity 16.9% 15.4% 15.9% 16.0% 13.6% 19.8% 9.5% 0.7% 9.8% (b) Return on Assets = Profit/Average Assets 1.6% 1.7% 1.3% 1.8% 1.4% 1.7% 0.6% 0.2% 2.2% (d) 1-tax rate 60.6% 64.1% 59.6% 64.1% 53.9% 55.5% 55.0% 33.5% 70.5% (e) Pre tax Return on Assets 2.6% 2.7% 2.1% 2.7% 2.6% 3.0% 1.0% 0.5% 3.2% (f) Contribution to Average Assets 3.3% 3.1% 2.7% 3.0% 3.5% 3.8% 2.2% 1.7% 3.3% (h) Operating Income to Avg. Assets 5.6% 6.6% 5.8% 5.4% 7.0% 8.0% 5.6% 6.1% 5.5% (j) Net Interest Income to Avg. Assets 3.9% 4.6% 4.0% 3.3% 4.8% 5.9% 3.8% 4.4% 3.4% (k) Non Interest Income to Avg. Assets 1.7% 2.0% 1.8% 2.1% 2.2% 2.1% 1.8% 1.7% 2.1% (i) Cost to Income 40.1% 52.8% 53.2% 45.6% 49.9% 52.7% 61.0% 72.3% 40.1% (g) Impairment to Average Assets 0.7% 0.4% 0.6% 0.2% 0.9% 0.8% 1.1% 1.2% 0.1% (c) Leverage (x) = Avg. Assets/Avg. Equity 10.6 9.0 12.6 9.1 9.8 11.8 16.5 4.2 4.4 (a) = (b)*(c) (b) = (d)*(e) (e) = (f)-(g) (f) = (h)*[1-(i)] (h) = (j)+(k) *March ended values of the following year Source: Company reports, NDBS Research 46

Competition in the Sector Financial Consolidation Fewer banks with larger market share CBSL under the previous regime proposed the financial consolidation. Current regime encourage voluntary consolidation only. Objective: To ensure Financial System Stability Expected Outcome: At least 5 Sri Lankan banks will have assets of LKR 1 Tn or more, with such banks also having a strong regional presence. Large Development Bank that will provide a substantial impetus to development banking activities in the country. Banks to substantially lower interest margins through increased efficiency and prudent management of assets and liabilities. Foreign banks in Sri Lanka to demonstrate a greater participation in economic activities and to make significant contributions to the economy. Domestic banks with assets less than LKR 100 Bn, was expected to increase their assets to LKR 100 Bn or more, through organic growth and merger/absorption with other banks banks/nbfis over a reasonable time horizon. State owned banks to grow and expand operations regionally and overseas Create larger banks in order to tap into international bond markets Source: CBSL 47

Contents Outlook for Listed Banking Stocks BFI Sector Listed Banking Counters Commercial Bank of Ceylon Hatton National Bank Sampath Bank National Development Bank Seylan Bank Nations Trust Bank Pan Asia Banking Corporation Union Bank of Colombo DFCC Bank 48

BFI Sector BFI Constantly Outperformed the ASPI & S&P SL20 21,000 19,000 17,000 15,000 13,000 11,000 9,000 Jun -12 Dec -12 Jun -13 Dec -13 Jun -14 Dec -14 Jun -15 BFI Indexed ASPI Indexed S&P SL20 Banks, Finance & Insurance Sector Among the Top Five Gaining Sectors in CSE 10% 1Yr Return 10% 2Yr Return 10% 3Yr Return 8% 8% 8% 6% 6% 6% 4% 4% 4% 2% 2% 2% % MFG BFI TRD S&S P&E ASPI S&P SL20 % IT MFG P&E BFI HLT ASPI S&P SL20 % P&E MFG BFI HLT BFT ASPI S&P SL20 *All of the above returns are as at end of July 2015 Source: CSE 49

BFI Sector BFI BFT C&P C&E DIV F&T HLT H&T INV IT L&P MFG MTR PLT P&E SRV S&S TLE TRD BFI BFT C&P C&E DIV F&T HLT H&T INV IT L&P MFG MTR OIL PLT P&E SRV S&S TLE TRD BFI Sector Valuation Vs. Other Sector Valuations Price to Earnings (PER) Price to Book (PBV) 5 4 3 2 1 6.0 5.0 4.0 3.0 2.0 1.0 Market Capitalization LKR Bn 16 14 12 10 8 6 4 2 Source: CSE Market Cap Market Share COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC 5.0% 4.0% 3.0% 2.0% 1.0% % Relatively low price multiples Currently, the counters contribute 13.8% to the total CSE market capitalization of LKR 3.2 Tn 50

BFI Sector BFI BFT C&P C&E DIV F&T HLT H&T INV IT L&P MFG MTR PLT P&E SRV S&S TLE TRD CSE Sectors Dividend Yield 7.0 6.0 Comparatively a high dividend paying sector with most of the banks having a consistent dividend payout 5.0 4.0 3.0 2.0 1.0 Listed Counters Outlook Dividend Yield 12.0% FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) 1% 8.0% 6.0% 4.0% 2.0% % COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC* *March ended values of the following year Source: CSE, Company reports, NDBS Research 51

BFI Sector Price to Book Value (x) 4.0 3.0 COMB.N 3.5 3.0 2.5 HNB.N 3.5 3.0 2.5 SAMP.N 2.0 2.0 1.5 2.0 1.5 1.0 1.0 0.5 1.0 0.5 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 4.0 3.0 NDB.N 3.0 2.5 2.0 DFCC.N 3.0 2.5 2.0 SEYB.N 2.0 1.5 1.5 1.0 1.0 0.5 1.0 0.5 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 3.5 3.0 2.5 2.0 1.5 1.0 0.5 NTB.N 3.0 2.5 2.0 1.5 1.0 0.5 UBC.N 4.0 3.0 2.0 1.0 PABC.N 2008 2009 2010 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 Source: Bloomberg, Company reports 52

BFI Sector Price to Earnings (x) 3 25.0 2 15.0 1 5.0 COMB.N 25.0 2 15.0 1 5.0 HNB.N 2 15.0 1 5.0 SAMP.N 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 2 15.0 1 5.0 NDB.N 12 10 8 6 4 2 PABC.N 5 4 3 2 1 SEYB.N 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 25.0 2 NTB.N 100 80 UBC.N 2 15.0 DFCC.N 15.0 1 60 40 1 5.0 20 5.0 2008 2009 2010 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015 Source: Bloomberg, Company reports 53

BFI Sector Price Multiples PBV comparison PBV (x) 2.50 2.00 1.50 1.00 0.50 PER comparison PER (x) 100 10 1 0 COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC 1.0 COMB HNB SAMP NDB SEYB NTB PABC UBC DFCC Regional performance PBV PBV( x) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2010 2011 2012 2013 2014 Vietnam Singapore Sri Lanka Thailand Indonesia Regional performance PER PER( x) 4 3 2 1 High in 2014 mainly due to UBC being above 200 times 2010 2011 2012 2013 2014 Singapore Thailand Indonesia Vietnam Sri Lanka Source: Bloomberg, Company reports 54

Listed Banking Counters Commercial Bank of Ceylon Target Price LKR 164.30 Recommendation Share Data Market Price as at 18.08.2015 52 Week Range Shares in Issue (as at 36.2015) Average Daily Volume (52 Weeks) Estimated Free Float (%) Price Performance Hold LKR 174.70 LKR 142.77-188.22 819,876,923 527,728 75.5 Main Shareholders as at 36.2015 No. of Shares % DFCC Bank 121,005,515 14.8 Employees Provident Fund 79,594,968 9.7 Mr.Y.S. H. I. Silva 63,807,960 7.8 SLIC - Life Fund 41,260,840 5.0 Franklin Templeton Investment Funds 36,843,309 4.5 Volume, LKR Mn 200 2 190 18.0 180 16.0 14.0 170 12.0 160 1 150 8.0 140 6.0 4.0 130 2.0 120 Aug-14 Nov-14 Feb-15 May-15 Volume Price Adjusted ASPI The largest listed private bank with group assets amounting to more than LKR 800 Bn. COMB also has the second largest branch network in Sri Lanka with 243 branches (and 613 ATMs) and a regional presence in Bangladesh (third largest bank in the country with 18 service points and 19 ATMs). Further, in June 2015 COMB opened a representative office in Myanmar and expects to venture into another regional country in the near future. During 1HFY15 the loan growth was 3.0%. The bank SME loan book accounts for ~40%. We expect the SME growth to boost the overall COMB loan growth. Further, COMB loan portfolio is well diversified with corporate sector exposure of ~40%. The exposure to gold backed loans is almost near zero (0.4% end of 2QFY15). We expect a 3 year CAGR in loans of 12.3% from FY15 to FY17. During 1HFY15 the deposit increased by 7.5%. Supported by the extensive reach across the country, COMB commands the highest group CASA ratio of 49.0% (2QFY15) compared to industry average of 36.0% in the listed space. Therefore, we estimate a 3 year CAGR in deposits of 12.8% from FY15 to FY17. We do not anticipate a significant increase in interest rates in the near future. Hence, we expect NIMs to decline from 4.1% (FY14) to 3.9% and then remain stable at 3.9% in FY16 and FY17. Although COMB has reached its maturity level in Sri Lanka, we expect it to maintain its consistent profit growth, low risk profile, adequate capital buffers and acceptable NPL levels. The bank also continues to look at opportunities beyond the island to support further growth. Source: Bloomberg, Company reports, CSE, NDBS Research 55

Listed Banking Counters Commercial Bank of Ceylon FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) EPS (LKR)* 11.5 12.1 12.8 13.1 15.7 17.7 NIM (%) 5.2 4.9 4.1 3.9 3.9 3.9 Cost to Income (%) 41.1 40.3 40.1 40.8 39.0 38.3 ROE (%) 20.8 18.5 16.9 16.0 16.9 18.2 Forward P/E (Times)** 8.9 9.7 13.3 13.4 11.2 9.9 DPS (LKR)*** 4.0 4.5 4.5 5.8 7.0 8.0 Dividend Yield (%) 3.9 3.8 2.6 3.3 4.0 4.6 BV (LKR) 60.5 70.2 81.3 88.6 97.3 107.0 PBV (Times)** 1.7 1.7 2.1 2.0 1.8 1.6 Tier 1 (%) 12.6 13.3 13.1 12.6 12.4 12.0 *Restated to existing no of shares **P/Es and PBVs from FY12-FY14 have been calculated using the year-end share price,p/es and PBVs for FY15-FY16 have been calculated using the current trading price ***No Scrip Dividends Forecasted Income Statement LKR Mn FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) Interest Income 52,663 62,177 61,933 67,297 78,328 91,678 Less : Interest expense 29,811 36,855 34,613 36,549 45,151 55,540 Net interest income 22,852 25,322 27,320 30,748 33,177 36,138 Non-Interest Income 10,162 10,297 11,841 11,451 14,319 15,876 Total Operating Income 33,014 35,619 39,160 42,199 47,496 52,013 Impairment Charge/(Reversal ) 3,158 4,600 4,898 5,498 5,573 5,649 Net Operating Income 29,856 31,019 34,262 36,701 41,923 46,365 Less: Operating Expenses 13,568 14,364 15,720 17,211 18,523 19,907 Operating Profit Before Tax 16,288 16,655 18,542 19,490 23,400 26,458 Share of profit/(loss) of Associates 12 7 7 7 8 9 Less: Tax 6,219 6,088 7,306 8,069 9,688 10,954 Profit After Tax 10,081 10,573 11,243 11,429 13,720 15,513 Less: Non-controlling interest 1 10 4 5 5 6 Profit Attributable to Equity Holders 10,080 10,563 11,239 11,424 13,715 15,506 56

Listed Banking Counters Commercial Bank of Ceylon Balance Sheet LKR Mn FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) Assets Cash and Cash Equivalents 19,752 14,264 20,622 23,957 15,885 24,617 Balances with Central Bank of Sri Lanka 18,168 18,432 19,634 21,917 24,569 28,166 Placements with banks 16,163 4,132 14,508 7,090 7,948 9,111 Tbills & Investments 65,355 130,965 221,011 242,237 248,365 242,963 Loans & Receivables to Other Customers a 373,486 419,490 498,716 555,373 619,257 706,111 Other Assets 18,790 19,432 21,910 24,224 24,505 25,435 Intangible Assets 506 478 856 858 858 858 Total Assets 512,221 607,192 797,258 875,656 941,387 1,037,261 Liabilities Due to Other Customers 390,569 451,099 529,267 590,822 662,307 759,259 Borrowings 4,848 15,606 26,862 34,268 33,115 37,963 Debt Issued and Other Borrowed Funds 48,672 65,054 147,290 147,706 132,461 113,889 Other Liabilities 15,132 13,948 22,585 25,212 28,263 32,400 459,220 545,707 726,004 798,007 856,146 943,511 Shareholder's Funds Stated Capital 18,009 19,587 21,458 21,458 21,458 21,458 Reserve Fund 3,433 4,035 4,327 4,899 5,585 6,360 Retained Earnings and Other Reserves 31,526 37,825 45,421 51,240 58,141 65,869 52,968 61,446 71,206 77,596 85,183 93,686 Non-controlling interests 32 39 48 52 58 64 Total Liabilities and Shareholders' Funds 512,221 607,192 797,258 875,656 941,387 1,037,261 57

Listed Banking Counters Hatton National Bank Target Price LKR 256.00 Recommendation Share Data Market Price as at 18.08.2015 52 Week Range Shares in Issue (as at 36.2015) Average Daily Volume (52 Weeks) Estimated Free Float (%) Price Performance 260 240 220 200 180 160 140 LKR Buy 120 Aug-14 Nov-14 Feb-15 May-15 LKR 226.40 LKR 167.10-240.30 323,802,033 156,171 75.5 Main Shareholders as at 36.2015 No. of Shares % SLIC 47,635,487 14.7 Employees Provident Fund 31,836,612 9.8 Milford Exports (Ceylon) Limited 25,828,280 8.0 Mr.Sohli Edelji Captain 23,705,220 7.3 Stassen Exports Ltd 22,387,096 6.9 Volume, Mn 1.2 1.0 0.8 0.6 0.4 0.2 Volume Price Adjusted ASPI The second largest private bank with group assets of LKR 661.3 Bn. However, the bank has the largest branch network in Sri Lanka with 250 branches in the listed space. The loans grew by 3.1% and 5.0% in 1QFY15 and 2QFY15 respectively. We estimate a 3 year CAGR in loans, mainly including SME and retail (~30 and ~24% respectively) of 15.3% from FY15 to FY17. The deposits grew by 10.2% during 1HFY15. With more access to the low cost depositors through the largest private branch network, we expect HNB to maintain its CASA at current levels of 43.5% (2QFY15). The acquisition of HNB Grameen (previously known as Prime Grameen Micro Finance) in 2014, should benefit HNB with higher exposure to the micro lending sector. Furthermore, we expect the Grameen portfolio to maintain its low NPL levels of less than 1.0% (according to company sources). The net fee income grew by 15.6% YoY to LKR 2.6 Bn in 1HFY15 mainly due to the growth in credit card volumes, trade facilities and worker remittances. However, noninterest income slightly deteriorated owing to net trading losses increasing from LKR 224.2 Mn to LKR 517.4 Mn mainly due to the adverse changes in fixed income and equity portfolios. However, we expect the bank to continue its focus on fee income. With HNB s presence across the country, maturing portfolio, exposure towards the key thrust sectors of the economy lead by SME sector, exposure towards a high quality micro portfolio, and improving CASA, we estimate a 3 year CAGR in profits of 8.0% from FY15 to FY17. Source: Bloomberg, Company reports, CSE, NDBS Research 58

Listed Banking Counters Hatton National Bank FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) EPS (LKR)* 2 19.1 24.2 20.6 24.9 30.6 NIM (%) 5.7 5.4 4.9 4.4 4.3 4.2 Cost to Income (%) 56.0 56.3 52.8 54.8 52.9 51.3 ROE (%) 17.0 14.0 15.7 11.9 13.3 14.8 Forward P/E (X)** 7.4 7.7 8.0 10.9 9.0 7.4 DPS (LKR) 8.5 8.5 8.5 8.5 8.8 9.0 Dividend Yield (%) 5.7 5.8 4.4 3.8 3.9 4.0 BV (LKR) 131.0 144.1 167.6 179.8 196.1 217.8 PBV (X)** 1.1 1.0 1.2 1.3 1.1 1.0 Tier 1 (%) 14.1 13.3 12.7 12.1 11.5 10.8 *Restated according to the existing number of shares **P/Es and PBVs for FY12-FY14 have been calculated using the year-end share price, P/Es and PBVs for FY15-FY17 have been calculated using the current trading price ***No Script Dividends Forecasted Income Statement Figures in LKR Mn FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) Interest Income 47,919 56,627 53,063 52,220 64,293 77,100 Less : Interest expense 25,496 31,577 27,078 25,726 35,334 44,843 Net interest income 22,424 25,050 25,985 26,493 28,959 32,257 Non-Interest Income 6,880 7,540 11,344 10,966 14,144 17,625 Total Operating Income 29,304 32,590 37,329 37,459 43,103 49,882 Impairment (Charge)/Reversal (1,142) (3,305) (2,532) (1,806) (1,951) (1,758) Net Operating Income 28,162 29,285 34,796 35,653 41,152 48,124 Operating Expenses 16,407 16,837 19,240 20,510 22,820 25,610 Personnel Cost 7,273 6,061 8,108 8,642 9,255 9,907 Depreciation of property & equipment 1,159 1,286 1,331 1,379 1,712 1,985 Other Operating Expenses 7,975 9,490 9,801 10,489 11,853 13,718 Share of profit/(loss) of Associates 17 128 143 136 149 164 Operating Profit Before Tax 11,771 12,575 15,699 15,279 18,482 22,678 Tax (3,669) (4,763) (5,631) (6,723) (8,132) (9,978) Profit after Tax 8,102 7,812 10,069 8,556 10,350 12,700 Non-Controlling Interests (160) (162) (248) (211) (255) (313) Profit Attributable to Equity Holders 7,942 7,650 9,820 8,345 10,095 12,387 59

Listed Banking Counters Hatton National Bank Balance Sheet Figures in LKR Mn FY12 (A) FY13 (A) FY14 (A) FY15 (E) FY16 (E) FY17 (E) Assets Cash and Cash Equivalents 20,516 14,672 18,518 15,038 19,028 13,176 Balances with Central Bank of Sri Lanka 19,950 16,367 16,908 19,315 22,230 25,785 T-bills & Investments 84,366 110,383 131,278 154,522 155,609 161,157 Loans & Receivables to Other Customers 303,271 352,846 401,282 451,495 522,400 615,620 Other Assets 30,660 30,006 31,200 32,836 38,902 45,124 Intangible Assets 690 1,121 1,090 1,090 1,090 1,090 Total Assets 459,453 525,395 600,275 674,297 759,258 861,952 Liabilities Due to Other Customers 340,848 385,001 425,620 482,883 555,745 644,628 Borrowings 25,880 36,110 48,481 62,775 61,132 58,017 Debt Issued and Other Borrowed Funds 17,418 23,566 34,090 28,973 33,345 38,678 Insurance provision 4,596 5,360 6,842 8,484 10,181 11,809 Other Liabilities 17,695 16,694 15,604 16,384 17,203 18,063 406,435 466,729 530,637 599,498 677,605 771,195 Shareholder's Funds Stated Capital 12,579 12,830 13,290 13,290 13,290 13,290 Reserve Fund 4,531 6,761 3,160 3,417 3,727 4,108 Retained Earnings and Other Reserves 34,938 37,970 51,455 56,147 62,435 70,845 52,048 57,562 67,905 72,854 79,453 88,243 Non-Controlling Interests 969 1,104 1,734 1,945 2,200 2,513 Total Liabilities and Shareholders' Funds 459,453 525,395 600,275 674,297 759,258 861,952 60